How the Financial Crisis Affected Millennials

With both the stock market and housing prices in record territory, it’s easy to look back at the Great Recession as little more than an unhappy memory. Easy, that is, unless you’re a member of the generation that came of age in the middle of the economic meltdown.

For Millennials – those born between 1981 and 1996, a date range recently clarified by the Pew Research Center – the real estate collapse and subsequent financial crisis had a lasting impact that still reverberates a decade later. It’s a period that affected these young adults in tangible ways, forcing them to slog through a feeble job market that’s taken years to recover. But it also shifted attitudes, sowing a distinct pessimism about whether their futures will be as bright as they were for their parents or grandparents.

Fewer Jobs

A decade later, it’s almost hard to recall exactly how scary the economic news was back in 2008. A sudden downturn in the real estate market shook not only homeowners, but the myriad Wall Street firms that had heavy exposure to mortgage-related assets. Investment bank Lehman Brothers filed for bankruptcy, JPMorgan bought out a struggling Bear Stearns at fire-sale prices and insurer AIG needed a government bailout to stay afloat.

As more and more bad news emanated from the financial sector, the stock market went on to lose more than 50% of its value between its 2007 peak and the spring of 2009. It didn’t take long for the turmoil in the financial sector to spill onto Main Street. By 2010, the resulting and abrupt cutback in consumer spending caused the labor market to shed nearly 9 million jobs.

That was the dreadful scenario in which many “older” Millennials started looking for work after earning their college degrees. Many were unable to find employment, at least for some time. Although a shortage of jobs affected every segment of the workforce after the housing bubble burst, younger adults were hit harder than most.

For those ages 16 to 24, the unemployment rate surged by nearly 8 percentage points between the fall of 2007 and the fall of 2009, reaching a high of 19%. For other age brackets, the jobless rate rose slightly over 5%. Just when college grads thought they’d be starting their careers and laying the foundation for their eventual retirements, the crisis pulled the rug out from under their feet.

Figure 1. Following the financial crisis, the unemployment rate increased more sharply for Millennials – many of whom had just graduated from high school or college – than for older age groups.

Source: Advisor Perspectives

It didn’t help that those graduates left school with a pile of student loans the size of which their parents’ generation never had to confront. According to the Project on Student Debt, roughly two-thirds of college students in 2008 graduated with student loan debt, with an average initial balance of $23,200 (today it’s even higher). In 1996, a mere 12 years earlier, only 58% borrowed to finance their education, and their average debt load was $13,200.

Since the recession, employment prospects have improved, slowly but surely. Today, the seasonally adjusted unemployment rate among Americans ages 25 to 34 – in other words, those right in the middle of the Millennial generation – is a mere 3.5%. And a survey by Paychex last year showed their annual wages increasing by 5.8%, rising significantly faster than the rest of the workforce.

Lower Savings

However, those years of struggling to find work after the downturn, along with hefty student loan bills, have taken a toll on this generation's ability to build wealth.

A recent report by the National Institute on Retirement Security found that 66% of Millennials in the workforce have nothing put away for their retirement, citing high unemployment after the 2008-2009 recession as well as stagnant wages.And according to the Federal Reserve Bank of St. Louis, the average Millennial has 34% less family wealth than this same age cohort in previous generations. What’s particularly unsettling about these statistics is that few of these workers have jobs that come with a pension, meaning they have an even bigger need to build a nest egg. (Read How Much Millennials Need to Save to Retire Comfortably.)

There’s also evidence that younger Americans who do put money into 401(k)s are opting for a more conservative approach that offers little opportunity for long-term growth. A Bankrate survey found that 30% of adults ages 18 to 37 believe cash is the best investment choice for money they won’t need for at least 10 years. Among those age 38 and older, only 21% said cash was the best option for long-term needs.

Some experts believe the Great Recession, along with the collapse of the dotcom bubble a few years before it, has a lot to do with that risk-averse approach. “The two economic busts left the Millennial generation uncertain about their own financial futures,” the consulting firm Watson Wyatt noted in a report on the financial meltdown.

Reluctance to Buy a Home

The stock market isn’t the only wealth-building strategy that Millennials have spurned. They’re also less likely than other age groups to buy a house where they can build equity over time.

Among those 25 to 34 years of age, the homeownership rate is a striking 8.4% lower than it was for members of Generation X when they were the same age, according to the nonprofit Urban Institute.

Figure 2. The number of young Americans choosing to buy a home has significantly declined since the housing market collapse. The data suggest that Millennials not only have less saved for a down payment, but they also are less likely to see the real estate market as a safe bet.

Source: Urban Institute

Certainly, the burden of more student debt, together with the tendency to postpone marriage until later in adulthood, would seemingly add to that trend. The fact that Millennials are more racially diverse than the American generations before them would generally correlate with lower home-buying numbers. But even among white married couples with significant income, the rate of homeownership is 2% to 3% lower than it was a generation or two ago.

It appears that this reluctance to lay down roots isn’t simply a matter of lacking the means – it may also reflect disillusionment with the housing market itself. An Urban Institute analysis of the Millennial housing market offered the following explanation:

“Baby boomers and Gen Xers saw homeownership as a place to live and as a store of value and the best way to build wealth, but millennials, whose formative years occurred during the Great Recession, are unlikely to take the wealth-building assumption as a given.” (See The Great Recession's Impact on the Housing Marketand Financial Crisis +10: Where Are Home Prices Now? )

For some economists, that’s not particularly good news for the broader economy. J.H. Cullum Clark of Southern Methodist University, for one, argues that a lack of wealth results in fewer people starting businesses and raising the next generation of workers, both of which could restrain long-term financial growth.

What’s perhaps less debatable is the harm it’s doing to Millennials themselves. Those who haven’t adequately saved and invested will find it harder to retire at a typical age, and they will have fewer resources to draw upon when the economy hits another rough patch.

In that regard, the Great Recession may just be a ticking time bomb, forgotten until the day when members of this vast generation have no choice but to face the consequences.

The Bottom Line

Unlike older generations who experienced relatively long periods of economic stability at some point in their lives, Millennial Americans, in their formative years, have been shaped by two financial calamities: the implosion of the dotcom bubble and the financial crisis of 2008. Those events are still having an effect on how young people make important financial decisions, creating a steely skepticism about whether the markets deserve their trust.